Soggy Australia House Market Boosted as Lending Rules Eased

(Bloomberg) -- Australia’s soggy housing market just got another shot in the arm.

The banking regulator Tuesday proposed easing lending rules that will allow home-buyers to borrow more, and central bank Governor Philip Lowe said policymakers will consider the case for cutting interest rates at its next meeting in two weeks’ time. The one-two combo could help reverse a credit crunch that has weighed on home prices.

The news is another win for the property market in recent days after Scott Morrison’s center-right government pulled off a shock election win on the weekend, killing off the opposition Labor party’s plans to wind back tax breaks for property investors. Bank shares gained for a second day on speculation the hat-trick of good news will help stem, or reverse, the slide in property prices.

The announcement from the banking regulator “represents a material easing in the credit constraint facing households,” David Plank, head of Australian economics at Australia & New Zealand Banking Group Ltd. said in a note. “This is an effective easing in policy settings, in our view.”

Read more: Australia goes ‘back to debt well’ as lending rules eased

There are already signs the slide in the housing market is easing. The drop in housing values slowed last month, according to CoreLogic Inc. data, suggesting the worst of the slump may have passed. Nonetheless, house prices in Sydney have slumped 14.5% from their mid-2017 peak, and Melbourne property values are down 11%.

“There’s a chance that the market will hit its bottom earlier than most are expecting if these changes come to fruition,” said Cameron Kusher, head of Australian research at CoreLogic. “It’ll bring into the market people that previously weren’t able to take out a mortgage.”

Westpac Banking Corp. rose 2.4% at 1:15 p.m. in Sydney trading, after Monday surging the most in 31 years; National Australia Bank Ltd. added 1.3% and ANZ Bank gained 1.7%. Commonwealth Bank of Australia rose 1.5%.

Currently, the Australian Prudential Regulation Authority requires lenders to use a minimum interest rate floor of 7% to assess whether a borrower can meet repayments. Most banks have set it at 7.25%, even though many mortgage rates are 4% or less.

Under the new proposals, lenders would be permitted to review and set their own floor as long as it builds in a 2.5% buffer above the borrower’s mortgage rate.

Rate Cut

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide, in some cases possibly unnecessarily so,” APRA Chairman Wayne Byres said in a statement Tuesday.

The central bank has held official interest rates at a record low 1.5% since August 2016, and Lowe today set the groundwork for a potential cut as soon as next month.

“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” Lowe said in the text of a speech in Brisbane Tuesday. “Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.”

According to ANZ Bank, household borrowing capacity has been cut by about 30% in recent years because of tighter lending rules imposed by the regulator, with the higher rate buffer accounting for almost a third of the reduction.

“APRA’s proposal will help support credit growth and could stem the fall in house prices,” Frank Mirenzi, senior credit officer, financial institutions groups at Moody’s Investors Service said in a note. “The proposal will likely increase borrowing capacity and potentially allow households to increase leverage.”

--With assistance from Michael Heath.

To contact the reporters on this story: Peter Vercoe in Sydney at pvercoe@bloomberg.net;Matthew Burgess in Melbourne at mburgess46@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net, Edward Johnson

©2019 Bloomberg L.P.